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HUD and KB Home reach record deal on mortgage underwriting violations.

By Nigel F. Maynard

HUD IS HOPING THAT THE RECORD $3.2 MILLION regulatory administrative settlement reached with KB Home Mortgage earlier this summer for alleged mortgage underwriting violations will be a warning to other builders that the government will not put up with those who don't follow the rules.

“This settlement sends a strong message that FHA will not tolerate violations of its requirements, especially when they cause homeowners to default on their mortgages,” said Brian D. Montgomery, assistant secretary for Housing-Federal Housing Commissioner, who chairs the agency's Mortgage Review Board, in a written statement.

Though not admitting any wrongdoing, KB Home is equally relieved that the matter has been put to rest. “We had already addressed this matter internally a while ago, but this allowed us to put it behind us and move on,” says Kate Mulhearn, a KB Home spokesperson.

The issue revolves around a number of loan originations by KB Home Mortgage—a subsidiary of Los Angeles–based KB Home—in Colorado, New Mexico, and Texas. After HUD's Quality Assurance Division performed routine risk-based reviews of those loans, the review board decided to launch an investigation of the company in March of last year. “We found that their default rate was higher than average,” says Lemar Wooley, a HUD spokesperson.

The review board discovered 13 violations that involved poor underwriting practices, including approving loans to borrowers who were not eligible; approving loans based on overstated or incorrect income; failing to include all of the borrower's debts; failing to properly verify sources of funds; and failing to ensure that gift letters met HUD requirements, HUD documents say.

Mulhearn says that the loans in question are from two years during an isolated period of time. “We may not have had all the documentation” that HUD was looking for, she says.

Wooley says that the settlement with HUD and the issues it was based on are not unusual, but he does note that $3.2 million is “the largest amount ever collected” in the 30-year history of the department's Mortgage Review Board—a panel that takes action against FHA-approved lenders. It is approximately $1 million more than the next largest settlement of this type, HUD says. Mulhearn says the figure is not material to the company's financial performance.

The agreement with HUD came at the same time that KB Home was reaching a $2 million warranty settlement with the Federal Trade Commission (FTC) on binding arbitration clauses included in the warranties of home purchasing agreements. The FTC alleged that the builder violated a 1979 consent decree with the commission that did not allow for binding arbitration.

NUMBERS GAME Many home buyers default on their loans, but HUD says that KB Home buyers were defaulting at a higher rate than the national average. The chart below is the lender's loan information broken down by HUD office jurisdiction. Total originations were for a two-year total. Defaults were loans reported as 90-day defaults sometime during the first two years of the origination. The default rate is KB's default rate, and the compare ratio is how it stacks up against all FHA loans within that HUD office jurisdiction. For example, KB's default rate was 300 percent of the average rate in the San Antonio jurisdiction. One hundred percent would mean exactly average, so 300 percent is triple the average rate, HUD says.